Bitcoin Community Members Speaks Up About Dual Nature of BlockFi’s Earning Crypto Interest Bank
BlockFi has seen support from major investors for their crypto opportunities, like Novogratz’s Galaxy Digital. With $52.5 million in support from these investors, they have been able to launch a product like none other – the option to gain 6.2% interest on both Bitcoin and Ethereum deposits. This product is added to BlockFi’s lending option as well, which lets consumers borrow up to $2,000 with a 4.5% interest rate, as long as they use three leading currencies.
Zac Prince of BlockFi explained in an announcement that their venture into crypto lending with Bitcoin creates an entirely new level to the market. He credits their new product development to the interest gauged from institutional investors since last year. This fully-insured product has already retained Gemini Trust as its custodian.
While the opportunity to earn interest on deposits is a great hook to attract investors, there is a problem that industry commentator ObiWan brings up via Twitter. By using deposits, the company ends up reusing collateral to make borrowing cash possible. Essentially, the whole system sets up BlockFi for possible inflation of Bitcoin, where there’s
“multiple claims and no backstop.”
He further supported this claim by posting the terms of service on Twitter.
1/Earning interest on your Bitcoin sounds like a great win. You HODL, put your bitcoin to work, earn some extra cash. But wait! @TheRealBlockFi crypto interest account rehypothecates your bitcoin. From their terms of service: pic.twitter.com/TV8Qfrq49W
— O₿iWan (@ObiWanKenoBit) March 6, 2019
There are many experts that say that Bitcoin has no risk of this type of activity since the Austrian Economics standard consider it to be the hardest money. However, a deposit account through BlockFi would change that, according to Bitcoin proponent Caitlin Long. With the implementation of a deposit, BTC spot could end up suppressed with the inflated BTC, and the supply of Bitcoin could rise above the hard limit of 21 million.
Along with ObiWan and Long, multiple other experts agree that this is the potential result, though it is not the only potential problem. John Carvalho, who is known for his advocacy of Bitcoin, hinted that these contributions to a deposit account would be a lot like giving away the ability to be
“your own bank.”
This is some ugly shit… "blah blah blah narrative blah blah, oh and here's a ref link." UNFOLLOW. 👏DON'T 👏 LEND 👏 YOUR 👏 BITCOIN!!! https://t.co/bFevR8b0Ok
— John Carvalho (@BitcoinErrorLog) March 5, 2019
These comments and product come just a few weeks after the Proof of Keys event. The promotion of the event was meant to show that it is not responsible to hold Bitcoin anywhere but with the user, even with an exchange that is known for its trustworthiness.